2009.— Senior researcher (Directeur de recherches) at CNRS (Centre National de la Recherche Scientifique/National Center for Scientific Research). Member of the Centre d’Economie de la Sorbonne, UMR 8174.

Associate researcher at Paris School of Economics, 2009-.

Member of the Scientific Committee of the LabEx (Laboratoire d’Excellence) REFI (Financial Regulation), 2011-.

Member of the Steering Committee on the Energetic Transition within the French government and of the Research team “Riskergy” (M. Lepetit) on Energetic Risk and sovereign debt, 2012-.

Coping with Collapse: A Stock-Flow Consistent Monetary Macrodynamics of Global

Coping with Collapse: A Stock-Flow Consistent Monetary

Macrodynamics of Global Warming

Updated version: January 5, 2017

Gaël Giraud Florent Mc Isaacz Emmanuel Bovarix Ekaterina Zatsepina

ARTICLE INFO ABSTRACT

This paper presents a macroeconomic model of endogenous growth that takes intoconsideration the economic impact of climate change, the pivotal role of private debtand income distribution. Using a Goodwin-Keen approach ([25]), based on the Lotka- Volterra logic, we couple its nonlinear monetary dynamics of underemployment and income distribution with abatement costs. Various damage functions `a la Nordhaus ([33]), Dietz-Stern ([10]), and Burke et al . ([5]) reflect the loss in final production, stock of capital, and labor productivity due to the rise in temperature. An empirical calibration of our model at the world-scale enables us to simulate plausible trajectories for a planetary business-as-usual scenario. Our main finding is that, even though the short-run impact of climate change on economic fundamentals may seem prima facie rather minor, its long-run dynamic consequences may lead to an extreme downside.

Under plausible circumstances, global warming forces the private sector to leverage in order to compensate for output and capital losses; the private debt overhang may eventually induce a global financial collapse, even before climate change could cause serious damage to the production sector. Under more severe conditions,the interplay between global warming and debt may lead to a secular stagnation followed by a collapse towards the end of this century. However, it turns out that increasing the wage share, fostering employment, or reducing the private-debt-to-output ratio makes it easier to avoid a collapse. The paper concludes by examining the conditions under which the +1.5 C and +2 C targets, adopted by the Paris Agreement (2015), could be reached thanks to an adequate carbon price trajectory.

1 Introduction

Given the increasing awareness about climate change, which crystallized at a diplomatic level in the Paris Agreement of December 2015, and the growing concern about potential downside consequences of a temperature increase, the question is raised of whether global warming might per se induce a severe breakdown of the world economy. This paper tackles this issue and looks for policies designed to mitigate climate change through abatement costs. In particular, at Paris, nearly 200 countries promised to try to bring global emissions down from peak levels as soon as possible.

More significantly, they pledged “to achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century.” That means getting to net zero emissions between 2050 and the end of this century. The UN’s climate science panel said net zero emissions must happen by 2070 to avoid dangerous warming —a claim reiterated at the COP22 summit of Marrakech (2016). Our results have implications on this.....